Withdraw RBI Guidelines on Microfinance Loans
C P Krishnan
THE Reserve Bank of India (RBI) has come out with a master direction on microfinance loans, removing the prevailing ceiling on interest rate. This will come into effect from April 1, 2022. This is the cruelest attack on the poor people, particularly women, who largely depend on this type of loan for their survival.
MICRO-BORROWERS DRIVEN AWAY FROM PSBS
With the advent of neo-liberal policies and the disinvestment of Public Sector Banks (PSBs) followed by the entry of private share-holder directors in their Board, PSBs were forced to dilute their role of financial inclusion and priority sector advances with the support of the nominees of the Union Government and the RBI in the Board. For instance, in 1994 the loans below Rs 25,000 were 18.3 per cent of the total loans and the number of beneficiaries was 5.58 crores, whereas in 2010 (after 16 years) this has been reduced to 1.3 per cent of the total loans while the number of beneficiaries was reduced to just 19 lakhs! Where did these more than 5 crores borrowers go? They were driven towards private Microfinance Institutions (MFIs) which had come into existence in large numbers during this period. The PSBs which denied small loans up to Rs 25,000 to micro-borrowers started lending hundreds of crores of rupees to MFIs and ironically categorising the same under priority sector. Everything was done deliberately with a well-designed scheme and the active support of the union government and the RBI with a view to shirk the responsibilities of the PSBs towards the hapless poor people and allowing private lenders to earn huge profit at the cost of these micro-borrowers.
MFIs started looking at these mostly rural poor, more particularly women borrowers, as a big market for them to earn predatory profit. These MFIs were free to fix their own interest rate on loans, lending mechanism, recovery mechanism, etc. They lured the poor women and the poor agricultural workers and lent them individually and collectively through self-help groups and joint-liability groups. They started squeezing the borrowers by charging processing fees, late fees and pre-closure fees and fixed the rate of interest between 48 and 60 per cent per annum. The recovery was made weekly/fortnightly using goons as recovery agents. The agents used to harass the poor borrowers who by chance defaulted repayment of loan even by a day, using abusive language in public in their work place/residence and charged penal rate of interest on the entire outstanding loan instead of the installment. There were hundreds of complaints against these MFIs particularly in the then Andhra Pradesh. But the administration remained a mute spectator. About 150 women were forced to commit suicide allegedly due to the harassment of MFIs. These MFIs used to take term life insurance policies with private insurance companies, get them assigned in their favour and claim the money after the demise of the borrowers who were abetted to commit suicide. The premium was deducted from the money lent.
Massive demonstrations and agitations were held by the democratic forces and women’s organisations against the harassment by the MFIs, participated by thousands of victims and their families in several parts of Andhra Pradesh. Various cases of harassment were covered by the media exposing the role of MFIs and thus this issue became a hot topic of discussion among the people. The political parties took up this issue and the election manifestos of some of the parties carried a poll promise to put an end to this harassment. This forced the then Andhra Pradesh government to enact a law, in the year 2010, regulating MFIs and other financial institutions with regard to microfinance lending. This was followed by RBI guidelines in line with the recommendation of Y H Malegam committee report submitted in January 2011. They brought many restrictions like capping the interest rate at 10-12 per cent above the rate of interest at which they get funds, interest rate to be transparent, sanction and disbursement of loans to be done only at a central place and more than one person to be involved in this, monthly recovery (not weekly or fortnightly recovery), no coercive method of recovery, no over-lending to an individual, lender or recovery agent not allowed to visit the place of work/residence of the borrower for the purpose of recovery, etc. The law of AP government and the RBI guidelines provided a great relief from the harassment suffered by micro-borrowers. This helped borrowers lodge complaints with the police whenever there was violation of law/guidelines and safeguard them to a large extent. Further there were many agitations demanding scrupulous implementation of the RBI guidelines with regard to recovery.
However, the rate of interest fixed at 22-24 per cent per annum through RBI guidelines was in no way helpful. While thousands of crores of rupees are lent to corporates at about 10 per cent or less per annum with a meagre or nil collateral security, it was paradoxical that the rate of interest for micro-borrowers was fixed as high as 24 per cent per annum. Left parties, trade unions and women’s organisations were insisting that the micro-lending had to be done by PSBs, regional rural banks (RRBs), cooperative banks at interest rate on par with that of priority sector lending, which ranged from 4 per cent (with government subsidy) to 9 per cent per annum and to cap the interest rate of private lending at 12 per cent; but there was no positive response from the union government/RBI.
But the RBI, instead of providing relief to the hapless poor people who do not have anything to pledge and depend on collateral-free small loan for their micro business/survival, has come out with fresh guidelines on March 14, 2022, removing the interest ceiling on microfinance loans. This will have disastrous consequences in the lives of crores of the poor people. Adding fuel to the fire, there is a clause in the recent RBI guidelines which allows the lender or his agent to visit the house/place of work of the borrower for recovery, if the borrower fails to appear at the central designated place. This clause will make the borrower defenseless against the persecution of the lenders.
Microfinance is perceived by the corporates as a highly profitable business at the cost of the poor people who have no proper means of livelihood. That is why they are deliberately exploited. Ironically this is called financial inclusion and inclusive growth. As a sequel to the recent RBI guidelines, the financial institutions will again hike the interest rate between 48 per cent and 60 per cent per annum; they will start harassing the borrowers by hiring goons. Thus, tragic incidents that were witnessed about 13-14 years ago will be repeated.
The RBI should withdraw the new guidelines on microfinance loans, initiate dialogue with all the stakeholders and issue fresh guidelines protecting the interest of the poor borrowers. The union government should direct the RBI accordingly.